Best Way To Increase NHS Pension Contributions?

Adamc

Hi 

I am trying to figure out if it is worth me increasing my pension contributions? I am in the 2015 scheme and have been for 6 years. Salary approx £42,000. In 30s. 

I'd love to retire early and possibly drop a day in the future. What would be the best way increase my pension as I know there are multiple ways some of which I do not meet the necessary criteria for (e.g. only available to previous schemes). I have a £1000 surplus at the end of each month after all bills and a rainy day fund of £15000. I have £18000 of student debt which is now 12 years old. 

How would this work? Could I increase contributions by £250 per month?
Would I need to have get nominee cover? 
Would my employer contribute at the same rate as they currently are? 

When would I need to think about tax or lump sum penalties?
Would all of the funds go to my spouse if I do not live to draw the pension?

I am still at a very early stage in looking into this but wanted to ask the community's advice.
At this stage, is it worth me speaking to a financial advisor regarding this?

Alternatively I could increase my overpayment on my 23 year mortgage of £155,000. 

Thanks in advance. 

Dazed_and_C0nfused

Would my employer contribute at the same rate as they currently are? 

This suggests you don't fully understand how the NHS (defined benefit) pension scheme works.

Both your contributions and the employer contributions are pretty much irrelevant, you are accruing a promise from the NHS to pay a pension of £X.  

Your choice now is whether to buy additional guaranteed (DB) and inflation proofed pension or to build up a pot of money (DC pension), either with whatever option the NHS has or a separate personal pension or SIPP.

Paying off your mortgage is generally consider poor choice financially when compared to contributing more to a pension, particularly with interest rates as they are.

Adamc

Dazed_and_C0nfused said:

Would my employer contribute at the same rate as they currently are? 

This suggests you don't fully understand how the NHS (defined benefit) pension scheme works.

I currently don't fully understand the scheme. Apologies for the misunderstandings. 

If my pension is 1/54th of my annual salary. How would I work out the effect of the increased payments?

xylophone

Have you read this

https://www.nhsbsa.nhs.uk/member-hub/increasing-your-pension

This post may be of interest

https://forums.moneysavingexpert.com/discussion/comment/78668361/#Comment_78668361

Dazed_and_C0nfused

Adamc said:

Dazed_and_C0nfused said:

Would my employer contribute at the same rate as they currently are? 

This suggests you don't fully understand how the NHS (defined benefit) pension scheme works.

I currently don't fully understand the scheme. Apologies for the misunderstandings. 

If my pension is 1/54th of my annual salary. How would I work out the effect of the increased payments?

You can't increase the 1/54th.

But you can buy specific amounts of extra pension, links provided by xylophone will help.

Remember if you end up buying extra NHS pension whilst earning £42k the real cost will be less as you will benefit from tax relief i.e. you pay £100 extra per month to buy £x pension means your take home pay will only drop by £80 as that £100 isn't taxed (net pay tax relief).

Whereas if you pay £100 into a personal pension or SIPP it gets £25 tax relief added so you have a pension fund of £125 (you don't save any personal income tax)  And don't have a guaranteed pension from that £125, that's down to how well you invest it.

Moonwolf

I have posted versions of this before. I am in the 2015 scheme and these are my un-expert and non-professional thoughts based on the research I did when I wanted to make additional contributions. 

In the 2015 scheme you pay for 1/54th of your salary added to your pension as a defined benefit each full year. You can't change that directly and as you already know, the percentage you pay depends on your salary range. 

There are three supported ways (in the 2015 scheme) of getting additional pension plus a couple of other options.

1. Additional purchase - using a lump sum or regular payment you can increase your pension by up to £6500 a year. There are some funny rules on this which you should read, the cost of living increases are not the same as your main pension and you have to decide if you are giving some to your dependants.

Pros: Good value for money compared with other similar risk investments.
Cons: For regular payments, you need to keep in the NHS to get the benefits. Lump sum payments might cause annual allowance issues. If you don't have a dependant cover then you lose the investment if you die early. Personally I found the rules complicated.

2. ERRBO - (Early Retirement Reduction Buy Out) This allows you to take your pension 1-3 years earlier without actuarial reduction. This can be valuable if you think you will retire early and live a long time (unless you know different you probably will but nothing is certain). You pay a fixed percentage extra from your salary which is higher the closer you are to retirement. If you leave the NHS it applies to the pension you have accrued.

Pros: Good value for money compared with other similar risk investments. No direct impact on lifetime allowance (as on its own it doesn't change the value of your final scheme, just when it is paid).
Cons: No benefit to dependants, all benefit lost if you die before retiring. Committed to regular increased payments for the rest of your career, messy if you cancel and difficult to suspend.

3. Discounted AVC scheme with one of two providers. I think both offer 0.4 percentage point reduction in the annual management charges on the funds you choose. Otherwise they are just standard pension investment funds that result in a DC scheme.

Pros: Can be more flexible when you take and use the fund, for example, draw down to use as a bridge between early retirement and taking your NHS pension. Might be transferrable if you leave the NHS. Pot is payable to dependants if you die.
Cons: You would probably need better than average fund growth to beat the long term value of the other two.

You could also save additional pension separately or save into e.g. ISAs but you don't get the input tax benefits (but you don't pay tax when you take the money out)

I was unable to find cost effective professional advice when I looked at this back in 2015 when I joined. Basically fixed fee advice would have cost me 5 years of what I was going to save. I (was) only planning to work for another 10. I decided my worst decision would cost less than that.

I went with ERRBO (which I had problems with but are now sorted) and paying extra into an existing DC pot with some savings in ISAs as well. This means that I have a good secure DB pension and extra that can be used more flexibly. I will be able to take my 2015 NHS pension at 65 without actuarial reduction and retire even earlier using my DC pot as a bridge. I won't need to take pension even earlier with an actuarial reduction.

For what its worth, my opinion of the ERRBO is that it is too inflexible for most but favours those in my position with an older partner who probably won't need to benefit from it directly, but as a couple we hope to benefit from me being able to retire on full pension earlier.

Adamc

For what its worth, my opinion of the ERRBO is that it is too inflexible for most but favours those in my position with an older partner who probably won't need to benefit from it directly, but as a couple we hope to benefit from me being able to retire on full pension earlier.

Thank you. ERRBO sounds like it fits my plans. Shame about the potential to lose it. However it seems very complicated to work out whether it's actually worth it. 

peter3hg

I don't agree that ERRBO doesn't benefit dependants.
The way I think about ERRBO is that for a given retirement age, it is a  ~17 % boost (dropping to ~11% at NRA) to the applicable pension entitlement. Your dependants will benefit from that 17% boost, it isn't lost.

I went with ERRBO partly because in effect it benefits from the 1.5% above CPI revaluation and by my calculation it was slightly better value than the additional pension.

One thing to note is that the cost can change depending on government discount rates.
A few years ago the percentage paid for ERRBO was increased by about 30% to get the same benefit.
The cost could increase or decrease in future as the discount rates change.

eLLeBee1986_2

Hi Adam

Just found your post and wondered how you were getting on.

I am basically in the same boat as you. I'm 35, worked in the NHS for almost 10 years, on 2015 scheme and would love to be able to retire early and pondering whether buying additional pension is for me.

Some super helpful comments here that given me a lot to think about!

Did you decide to go with ERRBO ? 

😁

Nurse2047

I pay into additional payments and NHS AVC with Pru 
https://www.pru.co.uk/pdf/AVCK0433.pdf

tbh setting up both was a nightmare with HR and NHS pensions. I’ve just changed employer within NHS and need to re-apply apparently ? 🤦‍♀️ 

Can you access your total reward statement? You can see how much annual pension you have accrued so far in the section- 
standard benefit- pension current value. 

I believe you can work out how much you  earn in pension each year by calculating your pensionable pay / 54 .